Jim Flaherty praised for prudent fiscal policy, steady hand in crisis

Economists arenot expecting a dramatic impact on the markets from Finance MinisterJimFlaherty'sresignationTuesday.

Flahertymade hisannouncement after the 4 p.m. ET close of the Toronto Stock Exchange.

"There might be a little ripple (in the markets), notably inthe Canadian dollar, which already took a big step back becauseofother remarksby another Ottawa policymaker," said Doug Porter, chief economist at BMO Capital markets."I don't thinkthere is a major implication."

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The dollar had fallen0.68 of a cent to 89.79 cents US earlier in the day after Bank of Canada Governor Stephen Polozgave agloomyspeechbefore the Halifax Chamber of Commerce in which he predicted slower growth than expected for the first few months of 2014.

But the currency held fairly steady intrading on foreign markets after Canadian markets closed, trading at around 89.65 cents US by 8:45p.m. ET.

Respected at home and abroad

Economists at the major Canadian banks had high praise for Flaherty, the longest-serving Conservative finance minister, and urged his successor to stay the course.

"He has left the fiscal balance on a very good trend, and I think he did an obviously tremendous job to reinforce Canada's AAA ratingand to reinforce the credibility of the fiscal objectives that were set post-recession," said Sbastien Lavoie, an economist at Laurentian Bank of Canada BLC Securities.

"We cannot forget his contribution prior to the crisis, where he certainly contributed to economic growth over all these years."

He's been quite effective when things really counted.- AveryShenfeld, economist,CIBCWorld Markets

There was widespreadpraise forFlaherty'sfiscal guidance during the financial crisis of 2008.

"His biggest decision was to a launch a significant fiscal stimulus at the height of the recession and then to carefully unwind it so as to not to dent growth too much during the recovery," saidCIBC World Markets economist Avery Shenfeld. "He's been quite effective when things really counted."

Shenfeld said he doesn't seeFlaherty'sdeparture as signalling "any significant change in Canadian fiscal policy" and was also not expecting it to roil markets.

FormerLiberal finance minister John Manley, current head of theCanadian Council of Chief Executives, said Flaherty had the respect of colleagues in Canada and abroad.

"I think he has been a steady hand, and he has been respected both at home and internationally, so people like that are hard to lose," Manley said.

Prime Minister Stephen Harper alsopraisedFlaherty's"steady hand"during the crisis and said he ably guided Canada "through the most challenging economic times since the Great Depression" and earned the country "a solid global reputation for economic management."

Armine Yalnizyanof the Centre for Policy Alternatives does not agree thatFlahertys fiscal management has beenprudent.

"Anyone can balance a budget. How you do it is what's important," she said in an interview with CBC's Metro Morning.

"The more than $220 billion in tax cuts promised in his budgets from 2006 to 2008 stripped the $18 billion budgetary surplus he inherited and undermined our revenue position, making the federal deficit far bigger than necessary, and adding to corporate cash piles that the Bank of Canada governor, Mark Carney, called "dead money". Not one tax cut was delayed or postponed during the crisis," she said.

She pointed to the massive cuts to federal monitoring for rail safety, food safety and tax enforcement as part of Flaherty's legacy, as well as the increase inequity in Canadian incomes.

The financial news agency Bloombergpointed outthat under Flaherty's guidance, Canadas economyoutperformed the G7average in all but one year (in inflation-adjusted terms).

Critics see lack of substantial legacy

But there were some in the financial community who said that while Flaherty controlled spending and was a good steward who got Canada through the financial crisis, he does not leave behind a particularly memorable legacy.

"There were a lot of tax gimmicks the $25 tax credit for your kid playing hockey and the tax free savings account, which has been a big political winnerbut Iwouldn't say anything tremendously innovative or something that would necessarily builda legacy," said David Baskin, president of Toronto-based Baskin Financial.

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EvenFlaherty'smuch-hyped Economic ActionPlan is not an especially strong candidate for a legacy and is seen as a black markon Flaherty's record by some,Baskinnotedin an interview with CBC Radio.

"Some people will say what we'll remember him for is blowing the budget, breaking the bank during the financial crisis, bailing out the car companies, spending huge amounts of money on these projects, which turned outperhaps not to be necessary," he said.

"His supporters will sayhe kept the ship on a steady keel during a very rough period and, in good times and bad times, kept the spending under control. But for me, it's difficult to look at it and say this was tremendous innovation ortremendous wisdom."

Erin Weir, an economist with the United Steelworkers union, was critical of Flaherty's slashing of the corporate tax rate from 22 per cent to 15 cent.

"That was an extraordinarily costly move," he said on CBC's Power & Politics. "The treasury gave up an awful lot of money and it's not clear that we got much, either in terms of investmentor job creation," he said.

No evidence income-splitting riftpromptedresignation

Several financial analysts discounted speculation that Flaherty's resignation might have been linked to hisstraying from the party lineonincome-splitting. Earlier this year,Flahertybacked away from the Conservatives' plans to expand income-splitting options for couples with children a policy that would be most beneficial where one spouse earns significantly more than the other.

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"It benefits some parts of the Canadian population a lot, and other parts of the Canadian population virtually not at all," Flaherty said of the policy, which some policy advisers have criticized as a type of social engineering thatbenefitsonly wealthy, two-parent families with a stay-at-home parent.

But Mark Chandler, head of fixed income and currency strategy at Royal Bank of Canada, cautioned against linking the issue to Flaherty's resignation, which the minister said was a decision he made with his family earlier in the year.

"We know nothing that would suggest that there's any schism between himself and anybody else in the party on policy, so Iwould say that this is not policy related. There's nothing inthe statementthat would suggest so," said Chandler.

'Friend of the taxpayer'

Bay Street did not seem entirely surprised to see Flaherty go.

"It's not a complete shock, the only question was over the timing," said Porter. "I think the conventional wisdom was he'd hang in there for another budget to show he had balanced the books, but,obviously, he didn't;he decided now was the time."

Porter said continuity should be the key objective ofwhoever takesover from Flaherty.

"They don't have to be a carbon copy of Mr. Flaherty, nobody could be, but in terms of the broad policy thrust, I think it was appropriate from a policy perspective, and most people would like to see that continue," he said.

The Canadian Taxpayers Federation called Flaherty a "friend of the taxpayer," pointing out his taxpayer-friendly accomplishments in a tweet, including his cuts to the GST and business taxes and the introduction of tax-free savings accounts.

TheCanadian Federation of Independent Business (CFIB) also highlighted the cuts to corporate taxes, specifically the tax thresholds for small business he introduced, as one of thepolicies that made Flahertya friend to business.

Italso pointed to theincreasein the lifetime capital gains exemption, which takes effect in the 2014 tax year, thefreeze inemployment insuranceand Canada Pension Plan premiums and the newcode of conductfor the debit and credit card industry.

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"MinisterFlahertyhas helped strengthen the environment for entrepreneurs in Canada and leaves a legacy of solid and practical policy decisions,"CFIB president Dan Kelly said in astatement.

The Canadian Bankers Association and the Investment Industry Association of Canada both praised Flaherty's introduction of a voluntary co-operative capital markets regulatory system, seen as a possible first step towarda national securities regulator.

"Canada isthe only industrialized country without a national securitiesregulator, and we continue to believe that Canada needs a singlenational voice on the international stage. Few others would haveshown such tenacity asMinisterFlaherty has over time on thisissue," the Canadian Bankers Associationsaid in a statement.

There was little mention Tuesday incorporate Canada, however, of some ofFlaherty's more controversial interventions, including:

• Several rounds oftightening of mortgage rules, which were not universally loved in the banking and real estate sectors.
• Hands-on attempts toput pressureon some banks and financial institutions to reverse their decisions to lower five-year mortgage rates, which many saw as undue meddling in the free market.
• The taxing of income trusts introducedin Flaherty's first year as finance minister and universally loathed on Bay Street and among investors in the trusts.